IRS restores significant issue rulings for spinoffs and reorganizations
IRS reinstates targeted letter rulings for corporate spinoffs and reorganizations
On May 5, 2026, the IRS released Rev. Proc. 2026-21 re-establishing a program that allows taxpayers to request private letter rulings (PLRs) on specific legal issues arising in corporate spinoffs, reorganizations and other nonrecognition transactions without requiring the IRS to rule on the entire transaction. This ‘significant issue ruling’ program was discontinued in 2024 but is now available again in response to practitioner feedback. The program applies to ruling requests submitted after May 5, 2026, and covers transactions under the Internal Revenue Code (Code) sections 332, 351, 355, 368 and 1036.
What taxpayers need to know about the IRS’ new significant issue ruling program
When a company undertakes a major corporate transaction, such as spinning off a division into a separate public company or merging with another corporation, there are often complex tax questions about whether the transaction qualifies for tax-free (or ‘nonrecognition’) treatment under the Internal Revenue Code (Code). Taxpayers can request a private letter ruling (PLR) from the IRS to obtain advance confirmation of the tax consequences before completing the deal.
Historically, taxpayers had two main options when seeking a PLR: request a ruling on the entire transaction (a ‘transactional ruling’), or request a ruling on just a specific, significant legal question within the transaction (a ‘significant issue ruling’). A significant issue ruling is narrower in scope in that it addresses only a particular legal issue that is genuinely uncertain and needs to be resolved, rather than requiring the IRS to analyze every aspect of the deal.
The IRS’ approach to these rulings has changed several times over the past two decades:
- From 2001 to 2013 (under Rev. Proc. 2001-3), the IRS generally would not rule on whether transactions qualified under sections 332, 351, 368 or 1036 unless a significant issue was present. If it ruled, it would address the entire transaction.
- In 2013 (Rev. Proc. 2013-32), the IRS shifted to ruling only on significant issues, rather than on entire transactions, for nonrecognition transactions under sections 332, 351, 355, 368 and 1036.
- In 2017 (Rev. Proc. 2017-52), the IRS introduced a pilot program allowing taxpayers to once again request full transactional rulings on section 355 spinoff distributions, while keeping the significant issue option available.
- In 2024 (Rev. Proc. 2024-1 and Rev. Proc. 2024-3), the IRS eliminated the significant issue ruling practice altogether and instead permitted comfort rulings and full transactional rulings for these transactions.
However, taxpayers and practitioners reported that full transactional rulings were time-consuming and resource-intensive to prepare and process. In September 2025, the IRS withdrew proposed regulations on spinoffs and removed restrictions on a company’s ability to obtain PLRs. In March 2026, the New York State Bar Association’s tax section formally urged the IRS to reinstate significant issue rulings, arguing it would provide greater certainty and accessibility for taxpayers. Rev. Proc. 2026-21 responds directly to this feedback.
Under the new program, a ‘significant issue’ must meet three criteria:
- It must be solely under the jurisdiction of the IRS’ Associate Chief Counsel (Corporate).
- It must be ‘significant,’ meaning it is a specific legal question that is genuinely uncertain. The IRS will not rule on issues where the answer is clearly established by existing law (those are called ‘comfort rulings’).
- It must involve the tax consequences or characterization of a transaction (or part of a transaction) described in Code sections 332, 351, 355, 368 or 1036.
In practical terms, a significant issue is a legal question that a taxpayer needs answered to determine the tax treatment of a deal, but where existing statutes, regulations and IRS guidance do not provide a clear answer.
Examples of significant issues
The following are examples of the types of issues that may qualify for a significant issue ruling. This list is non-exclusive.
- Section 355(e) plan issues: Whether a corporate spinoff and a subsequent acquisition are part of a ‘plan,’ which could cause the spinoff to be taxable to the distributing corporation
- Continuity of business enterprise (COBE): Whether the acquiring corporation in a reorganization continues the target’s historic business or uses a significant portion of the target’s assets, as required under Reg. section 1.368-1(d)
- Post-reorganization asset transfers: Whether transfers of assets after a reorganization jeopardize the tax-free treatment of the deal under Reg. section 1.368-2(k)
- Continuity of interest (COI): Whether the target company’s shareholders receive enough stock (as opposed to cash) to satisfy the continuity of interest requirement under Reg. section 1.368-1(e)
- Basis to transferors in section 351 exchanges: How a transferor’s tax basis in stock received in a section 351 exchange should be calculated under section 358, even if the exchange itself is straightforward
- Active trade or business: Whether the distributing and controlled corporations in a spinoff each satisfy the active trade or business requirement under section 355(b)
- Device and business purpose: Whether a spinoff is principally used as a ‘device’ to distribute corporate earnings tax-free, or whether the transaction has a sufficient corporate business purpose under section 355
- Reorganization definitional requirements: Whether a transaction satisfies the specific technical requirements to qualify as a tax-free reorganization under section 368
What does this mean for your transactions?
The reinstatement of significant issue rulings is a welcome development for companies considering corporate spinoffs, reorganizations and similar transactions. Key takeaways include:
- Faster, more targeted guidance: Taxpayers can now obtain IRS guidance on a specific uncertain issue without the time and expense of seeking a ruling on the entire transaction.
- Existing programs remain available: Full transactional rulings and comfort rulings continue to be available for taxpayers who prefer broader IRS confirmation of their transaction’s tax treatment.
- IRS discretion preserved: The IRS reserves the right to rule on other aspects of the transaction (including ruling adversely) if it believes doing so is in the interest of sound tax administration.
- Pre-submission conferences recommended: The IRS recommends that taxpayers request a conference with the Office of Associate Chief Counsel (Corporate) before preparing a ruling request to confirm that the issue qualifies for the program.
It is not always clear at the outset whether the IRS will entertain a ruling request on a particular issue. As a practical matter, taxpayers can use the pre-submission conference process to discuss the issue with the Office of Associate Chief Counsel (Corporate) and gauge whether it is appropriate for a significant issue ruling before investing in a full submission. These discussions can be framed at a high level and without identifying the taxpayer by name.
Effective date
The program applies to all letter ruling requests postmarked or received by the IRS after May 5, 2026.
How RSM US can help
RSM’s mergers and acquisitions (M&A) tax services team regularly assists companies with evaluating whether planned transactions present significant issues suitable for a ruling request, preparing and submitting letter ruling requests and navigating the pre-submission conference process with the IRS.
It is unclear which issues the IRS would be willing to consider under the revenue procedure for a ruling request as a general matter. Nonetheless, the IRS often provides opportunities for anonymous conversations with service providers (e.g., accounting firms, law firms) to evaluate the likelihood and availability for a ruling request based on facts and issues at play. If you are considering a corporate spinoff, reorganization or other nonrecognition transaction, please contact your RSM advisor to discuss how this new program may benefit your company.
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